The rapid negotiations of non-unionized labor catch up with inflation very easily. The opposite effect occurs in deflation, when organized wages remain high and non-organized wages contract sharply. We also know that inflation tends to shift income away from interest recipients and in favor of profit recipients. Again, we do not really know whether interest recipients are poorer or richer than profit recipients.
A similar fog of ignorance surrounds the distributive effects of price, wage and rent controls. As we have pointed out, almost the only administratively feasible procedure in this case consists of freezing a set of prices, wages or rents as they stand on a given date, and then establishing an administrative apparatus to adjust the relative structures when they become obsolete, either because of changes in productivity or because of some sense of injustice in the redistribution.
It has been universally found that this administrative machinery never keeps up with the high rate of obsolescence of any given relative price, wage or rent structure. In production and consumption, we tend to obtain shortages and surpluses. Goods whose prices are set relatively too low tend to disappear from the market.
Housing, under rent controls, where rents are too low, is not provided and is allowed to depreciate, so that no new private housing is built. If wages are set too low for a particular occupation, a serious labor shortage may occur, and all these things will create pressures for administrative changes. This, however, responds much more slowly to such feedback than change in the market system.
The general pattern is that tensions accumulate to the point where the whole system collapses and must be abandoned, or dissolves into black markets.
Once again, the distributive aspects of these policies have rarely been studied, and very little is really known about them. It is quite possible, for example, that under certain circumstances landowners may be poorer than their tenants, so that rent control, by lowering rents, creates an implicit grant from poorer landowners to richer tenants.
In the first two periods of price and wage control experienced by the United States over the last forty years, during the Second World War and during the Korean War, there seems to have been a shift in the distribution of national income in favor of wage earners and against profit earners, perhaps suggesting that price control is easier than wage control.
It will be interesting to see whether the same thing occurs in the 1971–1972 experiment with price and wage controls. What is certain is that wage, price and rent controls almost always create fairly large implicit income grants, redistributions about which we generally know very little.
Another field in which implicit grants have been almost completely neglected is that of conservation and environmental policies, and of public investments in such things as water projects, flood control, irrigation projects, ports, roads and bridges, all of which are presumably intended to alter the environment in favor of human beings.
The norm usually applied to justify these investments or structural alterations is cost-benefit analysis: an attempt to calculate in monetary terms the total costs and benefits of a project. Although this is frequently a rather ritual procedure designed to justify a decision made before the analysis is carried out, it is certainly better to have a cost-benefit analysis than to have nothing.
On the other hand, the distribution of costs and benefits is almost universally neglected. For example, the fact that benefits may be received by a group of people quite different from those who pay the costs is rarely taken into consideration.
There is a strong suspicion that the benefits of all kinds of environmental and development projects are likely to fall upon the richer part of the population, and that the costs are too often paid by the poor, simply because of their political weakness.
Thus, the benefits of public projects as virtuous as the Tennessee Valley Authority, the National Park System, the Soil Conservation Service, the Bureau of Reclamation and the Army Corps of Engineers very often go to the richer part of the population.
Poor people do not enjoy national parks, do not camp in national forests, do not sail on the lakes created by the TVA or by the Army Corps of Engineers; and it is even likely that the people protected by flood-control plans are property owners who had the poor foresight to build on floodplains.
Poor people may not be directly harmed by these projects and, insofar as the tax system is progressive, they may not be harmed at all. Redistributions may take place within the richer part of the population.
However, the possibility that the poor may suffer because of these otherwise virtuous projects is rarely, if ever, taken into consideration, and these questions must always be raised.
Perhaps this reflects the fact that economic theory has been obsessed with exchange and has not recognized the importance of the grants element in the economy, so that the theory of “incidence,” which is what we have really been discussing in this chapter, has been largely confined to those explicit public grants made through the tax system.
The fact that exactly the same problem of incidence arises in any public policy has, surprisingly, been forgotten.
